Bank and cash balances: confirmation, reconciliation and cash counts

Cash is the easiest balance to check and the easiest to steal. A bank can state in writing exactly what it holds for the client, and a physical count can settle what is in the safe. Yet the auditor must still ask the right bank the right questions, check the bank reconciliation and count cash at every place it is held at the same time.

Missing one account, or one location, is how fraud survives an audit.

This topic covers the nature of the audit of bank and cash, the principal risks, bank confirmation letters, the work on the bank's reply and the reconciliation, and the physical count of cash. The previous topic covered receivables and the next covers payables and provisions.

Key terms in plain English

Syllabus check

This topic is in syllabus area C, audit evidence and substantive procedures (25% of marks). It covers:

• substantive procedures for bank and cash balances
• external confirmations
• tests of existence, completeness and valuation

CAMA 2020 and bank and cash

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Features of the audit of bank and cash

Bank balances are amounts held in bank accounts. Cash balances are notes and coins, although coins are likely to be immaterial. These assets are at risk of loss and misappropriation, particularly where many people have authority over receipts and payments. But they are also easy to verify. Banks can confirm balances in writing, and cash can be counted. They are usually subject to strict internal controls.

Business entities usually receive regular bank statements, and a key control is the reconciliation of the bank statement balance to the cash book. The audit work on cash depends mainly on materiality, meaning how much cash is held, and on the effectiveness of the controls.

Principal risks

Other risks are window dressing, where a large cheque is recorded as paid before the year end but is not sent or presented until after it, which makes the bank balance look higher. "kiting", where money is moved between accounts to cover a shortage. A bank overdraft that is offset against a positive balance at another bank, when offset is not allowed, would also mislead.

Bank confirmation

Direct confirmation by the banks at which the entity holds accounts is an effective test, like confirming receivables. The auditor decides, on a risk basis, which banks to contact. Typically all banks that hold accounts are contacted, though some may be left out for immateriality. There are two ways:

• Method 1. The auditor lists information about the balances from the client's records and asks each bank to confirm it. A bank may hold several accounts for the same customer.
• Method 2. The auditor asks the bank to confirm the balance or balances without giving any details. This gives stronger evidence but may take the bank longer.

For an external audit the client must authorise the bank to release information to the auditor. The letter is in a standard form acceptable to banks and includes the client's authority, or refers to a standing authority the client has given. The auditor sends the letter, and the bank replies directly to the auditor. The letter normally covers:

• the balances on all accounts at the year end;
• unpaid bank charges;
• any liens or charges over the client's assets;
• any assets of the client held by the bank as security for lending; and
• any other accounts of the client that are known to the bank but not listed in the request.

Where the client has loans, guarantees, derivatives or other arrangements with the bank, the letter also asks for the details, since they are relevant to the audit of liabilities, contingencies and disclosure.

Work on the bank's reply and the reconciliation

1. Obtain or prepare a bank reconciliation for each account.
2. If the company prepared it, check the arithmetic.
3. Check the balance confirmed by the bank to the balance used in the reconciliation.
4. Relate other information in the confirmation to other areas, for example accrued bank charges must be provided for.
5. Check the items in the reconciliation to supporting evidence. For example, unpresented cheques should appear as presented on a later statement.
6. Review the cash book and bank statements for unusual items, including unusual delays between the cash book date and the bank statement date, and investigate them.
7. Review the bank's letter for other information to disclose, such as charges on assets and security for loans.

An uncleared lodgement, or a cheque dated before the year end and cleared a long time after, may signal window dressing or misappropriation. The auditor also looks at transfers between the client's accounts just before and after the year end, and at cheques written to cash or to unusual payees.

Cash balances: the physical count

The work on cash, as opposed to bank balances, is largely decided by materiality. Materiality is judged by the amount of cash held and also by the total transactions passing through the cash account in the period. Some businesses, such as hotel chains and supermarkets, hold cash at many locations. Each location may be immaterial but the total material. The main test is the physical count, and procedures include:

• counting cash at all locations simultaneously and in the presence of a company official. Simultaneous counting stops the client moving counted cash to the next location to be counted;
• obtaining a signed receipt for the amount returned to the official after the count;
• checking the amount counted to the client's cash records and the cash balance in the draft financial statements; and
• where relevant, investigating the treatment of any advances to employees, such as advances against wages or salary.

At the count the auditor also looks at what else is kept with the cash, such as IOUs, uncashed cheques, post-dated cheques and personal items, which may show that cash is being borrowed. For petty cash held under the imprest system, the auditor counts the cash and agrees cash plus vouchers to the float.

Cash at bank in the cash flow and disclosure

The auditor checks that the cash and cash equivalents in the statement of cash flows agree to the statement of financial position, that overdrafts are shown as liabilities unless the right of offset exists, that restricted cash, for example cash held as security or in a fund that cannot be used freely, is disclosed, and that cash in foreign currencies is translated at the closing rate.

Any bank accounts closed during the year, dormant accounts and accounts in names of directors or related persons are investigated.

Worked examples

1. The third account may be an undisclosed account, which is a risk of omitted cash or irregular dealings.
2. The auditor asks management to explain, traces its transactions and checks it is recorded.

1. The cash book shows the cheque paid in the old year, so cash and payables look lower than they really were.
2. If it was not sent until January, the auditor proposes an adjustment.

1. Cash could have been moved to the uncounted tills.
2. All locations should be counted at the same time, with an official present.

1. An unusually old item must be investigated.
2. It may be a cheque never sent, a fictitious payment or one to be cancelled and reversed.

How to score full marks

• State the three risks and the assertions.
• Explain why the auditor sends the letter and what it asks.
• List the steps on the bank reconciliation.
• For cash stress a simultaneous count and a receipt.

Common mistakes in the exam

• Relying on the bank statement from the client instead of a confirmation.
• Forgetting to ask about other accounts and security.
• Counting cash at different times.
• Not checking old reconciling items.

Quick revision

• Confirm with all banks, direct to the auditor.
• Reconcile; check the arithmetic and items to later statements.
• Count cash simultaneously; signed receipt.
• Look at unusual items and window dressing.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

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